Foreign investors undeterred by lower SEZ tax breaks under EU regs

Poland's recent general agreement with the European Commission on the contentious issue of reducing its tax breaks for foreign companies that invest in Special Economic Zones (SEZ) has not put off foreign companies from moving forward with investment projects, major foreign investors said. When it launched its SEZ program in 1997, the government promised up to 20 years of public aid in the form of tax breaks at twice the European Union's level for companies investing in economically stifled or underdeveloped areas. Poland originally granted 100% tax breaks to companies investing in SEZs for the firms' initial 10 years and a 50% break for the second 10 years. The EU, whose regulations Poland must adopt to join the bloc in 2004 or 2005, maintains a maximum tax-break ceiling of 50% for most industries, except motor vehicle producers. The generosity of the program, however, had to be limited in 2000 to satisfy EU competition legislation and its stricter public aid levels. Automobile producers, which are subject to stricter public aid levels than other manufacturers, according to EU law, were among the major foreign investors that received SEZ permits in Poland before the cut-off date on Jan. 1, 2001. Both General Motors Corp. (GM), which invested in a production plant in Gliwice in the Katowice SEZ, and Toyota Motor Corp., which invested in a manufacturing plant in the Wałbrzych SEZ in southwestern Poland, have been in talks with the government to defend their interests. But according to Przemysław Byszewski, GM's spokesman in Poland, his firm is confident it will reach a compromise on the issue.

The latest progress in talks sees the motor industry receiving a 30% maximum public aid level, in contrast to 15-18% in EU member coutries. "A 30% level is something we talked about and are willing to accept," Byszewski said. "It's definitely a good first step and a good signal for solving the problem." Despite the tax-break reductions, most foreign companies have not been discouraged from further investment in SEZs. Toyota announced last March that it would boost its investment in the Wałbrzych SEZ to include an engine production plant. The enlargement, slated for the end of 2004, would create 700 new jobs in the area, a company spokesperson said. Other industry officials agree that despite Poland having to change its SEZ tax-break limits to conform to EU standards, its negotiations with the bloc in this area have been a major achievement. "What the government is offering is the most it could gain from the EU, and the negotiated terms are already major achievements," said Adam Pawłowicz, the former president of the Polish Agency for Foreign Investment (PAIZ). "For most companies it is a trade-off. They lose out on money, but in the near future (they) will be compensated through Poland's accession, which will mean greater stability, predictability and credibility ... and a better business environment for investors, which should boost the inflow of FDI. At the end of the day, the deal foreign investors are getting is still much better than in the rest of the EU."

Although Poland's Office for Competition and Consumer Protection (UOKiK), the governmental body overseeing the negotiations, reached a primary consensus with the European Commission, the EU's executive arm, on July 26, the closure of the SEZ issue at the ministerial level is not expected until the end of September. The EC has bowed to most of Poland's demands, according to Alina Urban, the UOKiK's spokeswoman, although one outstanding issue still remains: What to do with companies that received permits between January 2000 and January 2001. The EC says these companies acted in bad faith since by 2000 it was clear that the laws on public aid levels would change. The body believes these companies hopped in on a last-chance basis to take advantage of the SEZs' hefty tax breaks. While the UOKiK is still pushing for these companies to be included in the initial batch of companies that received permits before the implementation of EU regulations, it is confident that the issue should not cause any further delays in the closing of Poland's EU negotiations, Urban said.